Foxconn incentives costly for a Wisconsin county's rating

CHICAGO – A Wisconsin county’s financial obligations to subsidize a $10 billion manufacturing plant continue to take a toll on its ratings as it prepares to sell $68 million of short-term debt.

Moody’s Investors Service stripped Racine County of its top MIG1 short-term rating on $79 million of outstanding taxable bond anticipation notes for the project, dropping the rating to MIG2 and assigning that lower rating to an upcoming $68 million BAN deal.

Wisconsin Gov. Scott Walker says record state and local subsidies are worth the value Foxconn's plant will add to the state's economy.
Bloomberg News

Proceeds of the May 22 competitive sale will finance land purchases for the Foxconn Technology Group plant being developed in the town of Mount Pleasant, between the Illinois border and Milwaukee.

Moody’s also revised its outlook on the county’s Aa2 general obligation rating to negative from stable. Moody’s downgraded the GOs one notch in late 2017 ahead of the $79 million BAN issue.

Both BAN issues mature on Dec. 1, 2020, but the county intends to take out the short-term borrowing in 2019 with GOs that would be repaid with revenue from a special assessment that will be levied in the Foxconn area.

“The structure of these BANs - specifically, the simultaneous maturity of the new series and the outstanding series - increases the refinancing risks borne by short-term investors,” Moody’s said in its report Tuesday.

“This amount of short-term debt is very high relative to the county's total outstanding debt and the county's available internal liquidity” of $46 million as of fiscal year-end 2016, Moody’s added. Those factors also partially drove the shift to a negative outlook on the county’s GOs.

The campus will house a 20-million-square-foot facility for the production and distribution of liquid crystal display panels. The Taiwanese company's choice of Wisconsin for the plant was announced by Gov. Scott Walker, President Donald Trump and Foxconn leaders at a White House ceremony last year. Walker has argued the $3 billion in incentives is worth the thousands of jobs and economic development he says the Foxconn project will bring to the state.

“The negative outlook reflects our view that the county has taken on substantial short-term leverage that could pressure the GO rating should the county experience difficulty in securing take-out financing for the BANs,” Moody’s said.

Local officials have previously said the project is worth the credit strain because they expect significant long-term fiscal benefits. Moody's also noted in its report that the county's economy is expected to grow due to the development and its financial position remains strong.

“Our ability to maintain a strong AA long-term rating reflects the continued confidence in the county’s creditworthiness," said a statement from Racine County Executive Jonathan Delagrave, who highlighted plans to take out the BANs next year. "In addition, the county has seen strong interest in its short-term debt offerings, which maintains Moody’s second-highest rating in today’s report. Once this refinancing is complete the short-term rating will be eliminated.”

The BAN borrowings are among a series of financings tied to $764 million in local incentives struck under the development agreement with Foxconn. The local funding will help cover the costs of public improvements, land acquisition and other expenditures for the project.

Ehlers & Associates Inc. is advisor to the village and PFM Financial Advisors LLC is advising the county.

In addition to the BANs and the permanent financing planned for next year that would be sold through negotiation with Morgan Stanley running the books, the county is planning a $33.2 million GO development bond issue to be sold competitively next year.

The village is planning a $56.4 million sewerage system revenue bond anticipation note. Officials may privately place that debt. The village will refund that debt in 2021 through a state clean water fund loan.

A $142.5 million negotiated tax-increment financing issue is planned through the village’s community development authority. It would sell in two pieces, one this year and the other next year, and they would carry the state’s moral obligation backing. The village is also borrowing $20 million through a state trust fund loan.

The state package grants Foxconn $3 billion in tax incentives over a 15-year period. The project has been billed as the largest economic development project in the state’s history. It’s also the largest subsidized incentive package ever awarded by a state. Construction is beginning this year with completion targeted for 2023. The state legislation authorizes $252 million of general fund-supported state borrowing to finance state highway projects.

The size of the second borrowing is larger than originally anticipated because land costs have increased.

"The overall debt to be issued by the county for this project is anticipated to be approximately the same as initially estimated due to a reduction in the costs of public improvements to be financed by the county," said the county's advisor at PFM, David Anderson.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.